Obama proposes $30 billion for small-business loans

President Obama is expected today to propose a plan to allocate $30 billion to community banks that agree to make loans to small businesses, according to The Washington Post. The initiative would give smaller banks the opportunity to receive money from the federal bailout program without the same conditions placed on recipients during the financial crisis, such as executive pay limits.

In excerpts from Obama's prepared remarks, he says: "These are the small, local banks that work most closely with our small businesses—that provide them their first loan and watch them grow through good times and bad. The more loans these banks provide to credit-worthy small businesses, the better a deal we'll give them."

Obama's proposal is part of a package of proposals he announced during his most recent State of the Union address; those proposals are meant to create jobs by helping small businesses, which employ the majority of U.S. workers, and include $33 billion in tax cuts for firms that create jobs or increase wages.

However, the Obama administration's economic agenda has struggled to obtain congressional support in the face of the U.S.' 10 percent unemployment rate. Some Republicans say the proposed use of bailout funds would stray too much from the Troubled Assets Relief Program's original mandate.

Additionally, Rep. Nydia Velázquez (D-N.Y.), chairwoman of the House Committee on Small Business, is concerned about relying on private banks to lend money to small businesses. She has advocated for allowing the Small Business Administration (SBA) to lend directly to small businesses; although a bill granting SBA the authority to do so passed the House in October 2009, the Senate has not taken action.

According to the Obama administration's plan to offer small-business lenders a relatively inexpensive way to raise capital, the banks would pay only 5 percent in a dividend to the government. The dividend could be reduced to as little as 1 percent if a bank increased its lending by 10 percent during the next two years. The program only would be open to banks with less than $10 billion in assets.

Some industry experts are concerned that the proposal does not address some of the key reasons lending has declined, such as firms being cautious before they make new loans; banks setting high demands for borrowers; and less demand for loans as families and businesses wait for the economy to improve. Additionally, banks with more than $10 billion in assets hold 54 percent of outstanding commercial and industrial loans to small businesses, so excluding those banks could limit the program's effects.

However, a senior administration official says the plan targets smaller banks because they devote a larger share of their lending to small businesses.